The best way to understand the Affordable Care Act (ACA) is to realize that it confers large benefits on some people and imposes large costs on others.
If you are one of the ones who will qualify for expanded Medicaid, you will get something for nothing. Although there are quality issues and access problems, including rationing by waiting, Medicaid will probably spend $8,000 on an average family of four over the course of a year. Enrollment is like an $8,000 gift from the government.
If your income is a tad too high for Medicaid, you will get something even better. In a newly created health insurance exchange you will be able to obtain, say, a $15,000 family plan for no more than about a $600 premium. This is almost something for nothing.
Things will be very different if you have a job, however.
Consider a typical hotel. Almost everyone you see is earning about $15 to $20 an hour — the maids, the waitresses, the waiters, the busboys, the doorman, the porters, the custodians, the groundskeepers, etc. The cost of family coverage is equal to between one-third and one-half of these workers’ annual earnings. The goal of ObamaCare is to force them to obtain this insurance with no extra help from government. And this is true even if the maids are already enrolled in Medicaid!
The economic literature on this type of mandate is clear. Although government can offer people something for nothing, the labor market does not. Employee benefits are not gifts from employers. They are substitutes for money wages and other benefits. The cost of the employer mandate will surely be borne by the employees themselves.
We can be fairly certain that low-wage workers and their employers will be searching for ways to avoid the mandate. Why? If the employees were willing to spend half their income on health insurance they would have done so already. That they have not indicates they would rather spend the money on something else.
Here are some options:
Stay Small. As long as employers restrict their workforce to no more than 49 employees the mandate doesn’t apply. We are already seeing news reports of this type of response. But here is a warning: the IRS has signaled that if an individual owns, say, three separate businesses, it will treat them as one business — not three! ObamaCare will not only discourage small businesses from growing, it will discourage entrepreneurs from acquiring other businesses.
Use Part-Time Labor. Another option is to move employees to part-time status (fewer than 30 hours a week) rather than full-time. One firm I talked with, managing about 100 fast food restaurants, had an average work week of 38 hours last year. This January they shifted to an average of 25 hours. Why in January? Because in January, 2014, the IRS will employ a 12 month look back to determine whether an employee is full-time. For those who try to use part-time labor to stay under the 50 employee mark, the IRS has an answer to that strategy as well. It will count two 20-hour-a-week employees as equivalent to one full time employee in determining how many employees the firm employs.
However, even if the mandate applies, the employer does not have to offer insurance to part-timers.
Use Non-Employee Labor. Independent contractors by definition are not employees. As long as they don’t work regular hours, workers can retain their status as contractors even if they work at the employer’s establishment. The temp business is booming in anticipation of this. Another approach is to turn employees into self-incorporated businesses. As one business owner has explained, “there is almost nothing that cannot be outsourced.”
Charge Employees the Maximum Allowable Premium. This I think will be the most attractive strategy. Under the ACA, health insurance is deemed “affordable” if the employee’s premium does not exceed 9.5% of the employee’s wages.
Take an employee earning $30,000 a year. Insurance is affordable so long as the employee pays no more than $2,850. So let’s suppose the employer’s individual coverage costs $4,500. Then the employer only has to pay $1,750. He can ask the employee to pay more than half the cost. Under the law, the employer doesn’t have to contribute anything for the employee’s dependents. Let’s say the employer offers family coverage that costs $15,000. The employer can ask the employee to pay $12,150, with the employer (again) paying only $1,750. If the employee accepts the offer, the employer is only out $1,750. [Remember: the employer fine for not offering any insurance is $2,000.] If the offer is rejected, the employer is off the hook — no health insurance costs and no government fine!
To add insult to injury, the employee’s contribution will be made with after-tax dollars. This is in contrast to the employer’s offer, which if accepted will be paid with before-tax dollars.
Now here is the cruel upshot of all this. Once the employer has offered “affordable” insurance (even though it really isn’t affordable), the employee and his family are no longer entitled to a subsidy in the exchange! If they buy insurance, they have to pay the full, unsubsidized premium. Yet it’s in the self-interest of the employer to do what I have described in order to avoid a $2,000 fine.
Pay the Fine. Employers can drop health insurance coverage altogether (or never provide it in the first place) and pay a fine equal to $2,000 per employee. That’s a stiff price to pay. But it’s less than the cost of health insurance. If the employer chooses this option, the employees will be eligible for subsidized insurance in the exchange.
One reason why many employers won’t want to get out of the health insurance business altogether is that everything said here reverses for high-income employees. Someone making, say, $90,000 will never quality for Medicaid. If he goes into the exchange, he will get no subsidy. But if he gets insurance at work, the employer’s premium payments avoid a 25% income tax, a 15% payroll tax and state and local income taxes as well. ObamaCare retained the subsidies in the current tax system, under which government effectively pays almost half the cost of insurance for higher-income employees.
How can employers avoid providing health insurance to below-average wage workers while providing insurance to those who earn above the average? That will be a challenge.
John Goodman, Contributor
Market-based solutions from the Father of Health Savings Accounts.